Corporate Transparency Act Imposes New Small Business Reporting Requirements
The Corporate Transparency Act (CTA), enacted as part of the Anti-Money Laundering Act of 2020 (AMLA), places new reporting requirements on many business entities in an effort to expose illegal activities, including the use of shell companies to launder money or conceal illicit funds. Around 30 million small businesses will be impacted by the law, which will establish a federal database of information, furnished by “reporting companies,” that will be accessible to certain authorities and organizations.
To counter the risks allegedly posed by anonymous shell companies, the CTA mandates the creation of a national registry that contains certain information about business entities that are formed by filing a document with a state’s secretary of state or similar office. CTA violations carry civil and criminal penalties, including imprisonment.
What does the CTA require?
Effective January 1, 2024, the CTA requires that certain businesses it identifies as “Reporting Companies” to disclose to FinCEN information about the company, its beneficial owners, and in some cases, the company applicant. Reporting Companies that are created or registered prior to January 1, 2024, have until January 1, 2025, to file an initial report; reporting companies created or registered after January 1, 2024 and before January 1, 2025, will have ninety days after creation or registration to file a report. Entities created on or after January 1, 2025 will have 30 days to submit the reports to FinCEN.
Does the CTA require my business to report?
The CTA applies to companies that are created by filing a document with a state authority. Typically, this includes corporations and limited liability companies. Depending on the state, it could also include limited partnerships, professional associations, cooperatives, real estate investment trusts, and trusts. In addition, the CTA applies to non-US companies that are registered to operate in the United States. NFIB estimates that, based on these rules, 30 million small businesses will have to report to FinCEN.
You should presume your business is subject to the reporting requirement unless the business falls under one of the limited exemptions. These exemptions are primarily applicable to industries that are already heavily regulated. Your business may also be exempt from the reporting requirements if it employs more than 20 full-time employees as defined by federal law, filed a return showing more than $5 million in gross receipts or sales, and has a physical office located within the United States. You can find out more information about available exemptions at: https://fincen.gov/boi.
What information must be provided in the reports?
The CTA requires three categories of information to be reported: company, owners, and applicant.
Domestic reporting companies created before January 1, 2024 must provide information about the company and its beneficial owners.
Beneficial owner is defined in the CTA as an individual who exercises “substantial control” over the reporting company or has an ownership interest of at least 25 percent. Company senior officers, directors, and others who make significant decisions on behalf of the company may meet this statutory definition of “substantial control,” although the broad definition may cause confusion in some instances.
Domestic reporting companies created on or after January 1, 2024, must provide information about the company, its beneficial owners, and its company applicants.
A company applicant generally is the individual who files the formation document with state authorities for the reporting company.
Technically, the information to be filed with FinCEN is called a Beneficial Ownership Information (BOI) Report. The following is what is required in the report for a company, an owner, and an applicant:
The reporting company must provide its name and any alternative (DBA) names, the address of its principal place of business, the state of formation, and its taxpayer identification number or FinCEN identifier.
Each beneficial owner of a reporting company must furnish their full legal name, date of birth, residential address, and an identification number from a driver’s license, passport, or other state-issued identification (ID), along with a copy of the ID document.
A company applicant is required to submit the same information as a beneficial owner.
Who has access to FinCEN BOI reports?
The CTA authorizes FinCEN to disclose BOI information to five categories of recipients:
US federal, state, local, and tribal government agencies
Foreign law enforcement agencies, judges, prosecutors, and other authorities
Financial institutions
Federal regulators
US Department of the Treasury
FinCEN may only disclose BOI information “under specific circumstances”: there are more stringent requirements for agencies other than those engaged in national security, intelligence, and law enforcement activities. There are also restrictions on how the information may be used and how it must be secured.
Are there penalties for noncompliance with the CTA?
Penalties for noncompliance may be steep. Willingly providing false information (including false identifying documents) to FinCEN, or failing to report complete BOI information, can result in:
Fines of $500 per day, up to $10,000
Imprisonment for up to two years
Civil and criminal liability may be avoided if an individual who submitted an original, erroneous report did not knowingly submit inaccurate information and submits an updated report correcting the inaccurate information within ninety days.
Where Do You File Your Report?
FinCEN is now accepting reports and they are filed online only at: https://fincen.gov/boi. You can also find out more information about your obligations under the CTA at this same website.
Compliance with the CTA does not end with the filing of the initial report. Updates must be filed within 30 calendar days of any change in the information reported about the company or its beneficial owners. This obligation continues as long as the company remains a reporting company. Penalties can also be imposed for noncompliance with the updating requirement. So, make sure you have a procedure in place to keep track of your reported information and are aware of when updates must be filed.
Please be advised that FinCEN has been notified of fraudulent attempts to solicit information from individuals and entities who may be subject to reporting under CTA. The correspondence may be titled “Important Compliance Notice” and ask the recipient to click on a URL or scan a QR code. These emails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these messages or click on any links or scan QR codes within them.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.